administrators executors, and survivors,ss-4 56 1040 1041 706 709 1310 file all tax returns,...

ContentsReminders . . . . . . . . . . . . . . . . . . . 2Introduction . . . . . . . . . . . . . . . . . . 2Personal Representative . . . . . . . . . . 2

Duties . . . . . . . . . . . . . . . . . . . 2Fees Received . . . . . . . . . . . . . . 3

Final Income Tax Return for Decedent—Form 1040 . . . . . . . . . 3Name, Address, and Signature . . . . . 3When and Where To File . . . . . . . . 4Filing Requirements . . . . . . . . . . . 4Income To Include . . . . . . . . . . . . 4Exemptions and Deductions . . . . . . 6Credits, Other Taxes, Payments . . . . 6Tax Forgiveness for Armed

Forces Members, Victims of Terrorism, and Astronauts . . . . . . 7

Filing Reminders . . . . . . . . . . . . . 8Other Tax Information . . . . . . . . . . . . 9

Tax Benefits for Survivors . . . . . . . . 9Income in Respect of Decedent . . . . 9Deductions in Respect of

Decedent . . . . . . . . . . . . . . 12Estate Tax Deduction . . . . . . . . . 12Gifts, Insurance, Inheritances . . . . . 12Other Items of Income . . . . . . . . . 14

Income Tax Return of an Estate— Form 1041 . . . . . . . . . . . . . . . 15Filing Requirements . . . . . . . . . . 15Income To Include . . . . . . . . . . . 16Exemption and Deductions . . . . . . 17Credits, Tax, and Payments . . . . . . 19Name, Address, and Signature . . . . 20When and Where To File . . . . . . . 20

Distributions to Beneficiaries . . . . . . 20Currently Distributed Income . . . . . 20Other Amounts Distributed . . . . . . 21Discharge of a Legal Obligation . . . 21Character of Distributions . . . . . . . 21How and When To Report . . . . . . . 22Bequest . . . . . . . . . . . . . . . . . 22Termination of Estate . . . . . . . . . 23

Estate and Gift Taxes . . . . . . . . . . . 24Applicable Credit Amount . . . . . . . 25Gift Tax . . . . . . . . . . . . . . . . . 25Estate Tax . . . . . . . . . . . . . . . . 26

Comprehensive Example . . . . . . . . . 26Final Return for Decedent . . . . . . . 27Income Tax Return of an Estate . . . 28

Table A. Checklist of Forms and Due Dates . . . . . . . . . . . . . . . 40

Table B. Worksheet To Reconcile Amounts Reported in Name of Decedent . . . . . . . . . . . . . . . . 41

How To Get Tax Help . . . . . . . . . . . 42Index . . . . . . . . . . . . . . . . . . . . . 44

Department of the TreasuryInternal Revenue Service

Publication 559Cat. No. 15107U

Survivors,Executors, andAdministrators

For use in preparing2013 Returns

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Future DevelopmentsFor the latest information about developments affecting Publication 559, such as legislation enacted after we release it, go to www.irs.gov/pub559.

RemindersThroughout this publication, section references are to the Internal Revenue Code unless otherwise noted.Consistent treatment of estate and trust items. Beneficiaries must generally treat estate items the same way on their individual returns as they are treated on the estate's return.Photographs of missing children. The Inter-nal Revenue Service is a proud partner with the National Center for Missing and Exploited Chil-dren. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

IntroductionThis publication is designed to help those in charge (personal representatives) of the prop-erty (estate) of an individual who has died (de-cedent). It shows them how to complete and file federal income tax returns and explains their re-sponsibility to pay any taxes due on behalf of the decedent. A comprehensive example of the decedent's final tax return, Form 1040, and es-tate's income tax return, Form 1041, are inclu-ded in this publication.

The publication also explains how much money or property a taxpayer can give away during their lifetime or leave to their heirs at their death before any tax will be owed. A discussion of Form 709, United States Gift (and Genera-tion-Skipping Transfer) Tax Return, and Form 706, United States Estate (and Genera-tion-Skipping Transfer) Tax Return, is included.

Also included in this publication are the fol-lowing items:

A checklist of the forms you may need and their due dates.A worksheet to reconcile amounts reported in the decedent's name on information re-turns including Forms W-2, 1099-INT, 1099-DIV, etc. The worksheet will help you correctly determine the income to report on the decedent's final return and on the re-turn for either the estate or a beneficiary.

Comments and suggestions. We welcome your comments about this publication and your suggestions for future editions.

You can send us comments from http://www.irs.gov/formspubs. Click on “More Infor-mation” and then on “Give us Feedback.” Or you can also send your comments to the Inter-nal Revenue Service, Tax Forms and Publica-tions Division, 1111 Constitution Ave. NW, IR-6526, Washington, DC 20224.

Useful ItemsYou may want to see:

PublicationArmed Forces' Tax Guide

Form (and Instructions)Application for Employer

Identification NumberNotice Concerning Fiduciary RelationshipU.S. Individual Income Tax ReturnU.S. Income Tax Return for Estates

and TrustsUnited States Estate (and Generation-Skipping Transfer) Tax ReturnUnited States Gift (and Generation-Skipping Transfer) Tax ReturnStatement of Person Claiming

Refund Due a Deceased TaxpayerSee How To Get Tax Help near the end of this publication for information about getting publi-cations and forms. Also near the end of this publication is Table A, a checklist of forms and their due dates for the executor, administrator, or personal representative.

Personal RepresentativeA personal representative of an estate is an ex-ecutor, administrator, or anyone who is in charge of the decedent's property. Generally, an executor (or executrix) is named in a dece-dent's will to administer the estate and distribute properties as the decedent has directed. An administrator (or administratrix) is usually appoin-ted by the court if no will exists, if no executor was named in the will, or if the named executor cannot or will not serve.

In general, an executor and an administrator perform the same duties and have the same re-sponsibilities.

For estate tax purposes, if there is no execu-tor or administrator appointed, qualified, and acting within the United States, the term “execu-tor” includes anyone in actual or constructive possession of any property of the decedent. It includes, among others, the decedent's agents and representatives; safe-deposit companies, warehouse companies, and other custodians of property in this country; brokers holding securi-ties of the decedent as collateral; and the debt-ors of the decedent who are in this country.

DutiesThe primary duties of a personal representative are to collect all the decedent's assets, pay his or her creditors, and distribute the remaining assets to the heirs or other beneficiaries.

The personal representative also must per-form the following duties.

Apply for an employer identification num-ber (EIN) for the estate.

3

SS-4

56

1040 1041

706

709

1310

File all tax returns, including income, es-tate and gift tax returns, when due.Pay the tax determined up to the date of discharge from duties.

Other duties of the personal representative in federal tax matters are discussed in other sec-tions of this publication. If any beneficiary is a nonresident alien, see Publication 515, With-holding of Tax on Nonresident Aliens and For-eign Entities, for information on the personal representative's duties as a withholding agent.

Penalty. There is a penalty for failure to file a tax return when due unless the failure is due to reasonable cause. Reliance on an agent (at-torney, accountant, etc.) is not reasonable cause for late filing. It is the personal represen-tative's duty to file the returns for the decedent and the estate when due.

Identification number. The first action you should take if you are the personal representa-tive for the decedent is to apply for an EIN for the estate. You should apply for this number as soon as possible because you need to enter it on returns, statements, and other documents you file concerning the estate. You also must give the number to payers of interest and divi-dends and other payers who must file a return concerning the estate.

You can get an EIN by applying online at www.irs.gov (click on "Apply for an EIN Online" under the Tools heading). Generally, if you ap-ply online, you will receive your EIN immedi-ately upon completing the application. You can also apply using Form SS-4, Application for Em-ployer Identification Number. Generally, if you apply by mail, it takes about 4 weeks to get your EIN. See the form instructions for other ways to apply.

Payers of interest and dividends report amounts on Forms 1099 using the identification number of the person to whom the account is payable. After a decedent's death, Forms 1099 must reflect the identification number of the es-tate or beneficiary to whom the amounts are payable. As the personal representative han-dling the estate, you must furnish this identifica-tion number to the payer. For example, if inter-est is payable to the estate, the estate's EIN must be provided to the payer and used to re-port the interest on Form 1099-INT, Interest In-come. If the interest is payable to a surviving joint owner, the survivor's identification number, such as an SSN or ITIN, must be provided to the payer and used to report the interest.

If the estate or a survivor may receive inter-est or dividends after you inform the payer of the decedent's death, the payer should give you (or the survivor) a Form W-9, Request for Tax-payer Identification Number and Certification (or a similar substitute form). Complete this form to inform the payer of the estate's (or if completed by the survivor, the survivor's) identi-fication number and return it to the payer.

Do not use the deceased individual's identifying number to file an individual income tax return after the decedent's

final tax return. Also do not use it to make estimated tax payments for a tax year after the year of death.

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Penalty. If you do not include the EIN or the taxpayer identification number of another per-son where it is required on a return, statement, or other document, you are liable for a penalty for each failure, unless you can show reasona-ble cause. You also are liable for a penalty if you do not give the taxpayer identification num-ber of another person when required on a re-turn, statement, or other document.

Notice of fiduciary relationship. The term fiduciary means any person acting for another person. It applies to persons who have posi-tions of trust on behalf of others. A personal representative for a decedent's estate is a fidu-ciary.

Form 56. If you are appointed to act in a fi-duciary capacity for another, you must file a written notice with the IRS stating this. Form 56, Notice Concerning Fiduciary Relationship, is used for this purpose. See the Instructions for Form 56 for filing requirements and other infor-mation.

File Form 56 as soon as all the necessary information (including the EIN) is available. It notifies the IRS that you, as the fiduciary, are assuming the powers, rights, duties, and privi-leges of the decedent. The notice remains in ef-fect until you notify the IRS (by filing another Form 56) that your fiduciary relationship with the estate has terminated.

Termination of fiduciary relationship. Form 56 should also be filed to notify the IRS if your fiduciary relationship is terminated or when a successor fiduciary is appointed if the estate has not been terminated. See Form 56 and its instructions for more information.

At the time of termination of the fiduciary re-lationship, you may want to file Form 4810, Re-quest for Prompt Assessment Under Internal Revenue Code Section 6501(d), and Form 5495, Request for Discharge From Personal Li-ability Under Internal Revenue Code Section 2204 or 6905, to wind up your duties as fidu-ciary. See below for a discussion of these forms.

Request for prompt assessment (charge) of tax. The IRS ordinarily has 3 years from the date an income tax return is filed, or its due date, whichever is later, to charge any addi-tional tax due. However, as a personal repre-sentative, you may request a prompt assess-ment of tax after the return has been filed. This reduces the time for making the assessment to 18 months from the date the written request for prompt assessment was received. This request can be made for any tax return (except the es-tate tax return) of the decedent or the dece-dent's estate. This may permit a quicker settle-ment of the tax liability of the estate and an earlier final distribution of the assets to the ben-eficiaries.

Form 4810. Form 4810 can be used for making this request. It must be filed separately from any other document.

As the personal representative for the dece-dent's estate, you are responsible for any addi-tional taxes that may be due. You can request prompt assessment of any of the decedent's taxes (other than federal estate taxes) for any years for which the statutory period for

assessment is open. This applies even though the returns were filed before the decedent's death.

Failure to report income. If you or the de-cedent failed to report substantial amounts of gross income (more than 25% of the gross in-come reported on the return) or filed a false or fraudulent return, your request for prompt as-sessment will not shorten the period during which the IRS may assess the additional tax. However, such a request may relieve you of personal liability for the tax if you did not have knowledge of the unpaid tax.

Request for discharge from personal liabil-ity for tax. An executor can make a request for discharge from personal liability for a dece-dent's income, gift, and estate taxes. The re-quest must be made after the returns for those taxes are filed. To make the request, file Form 5495. For this purpose, an executor is an exec-utor or administrator that is appointed, qualified, and acting within the United States.

Within 9 months after receipt of the request, the IRS will notify the executor of the amount of taxes due. If this amount is paid, the executor will be discharged from personal liability for any future deficiencies. If the IRS has not notified the executor, he or she will be discharged from personal liability at the end of the 9-month pe-riod.

Even if the executor is discharged from personal liability, the IRS will still be able to assess tax deficiencies

against the executor to the extent he or she still has any of the decedent's property.

Insolvent estate. Generally, if a decedent's estate is insufficient to pay all the decedent's debts, the debts due to the United States must be paid first. Both the decedent's federal in-come tax liabilities at the time of death and the estate's income tax liability are debts due to the United States. The personal representative of an insolvent estate is personally responsible for any tax liability of the decedent or of the estate if he or she had notice of such tax obligations or failed to exercise due care in determining if such obligations existed before distribution of the estate's assets and before being discharged from duties. The extent of such personal re-sponsibility is the amount of any other pay-ments made before paying the debts due to the United States, except where such other debt paid has priority over the debts due to the Uni-ted States. Income tax liabilities need not be formally assessed for the personal representa-tive to be liable if he or she was aware or should have been aware of their existence.

Fees Received byPersonal RepresentativesAll personal representatives must include fees paid to them from an estate in their gross in-come. If you are not in the trade or business of being an executor (for instance, you are the ex-ecutor of a friend's or relative's estate), report these fees on your Form 1040, line 21. If you are in the trade or business of being an execu-tor, report fees received from the estate as

CAUTION!

self-employment income on Schedule C or Schedule C-EZ of your Form 1040.

If the estate operates a trade or business and you, as executor, actively participate in the trade or business while fulfilling your duties, any fees you receive related to the operation of the trade or business must be reported as self-em-ployment income on Schedule C (or Sched-ule C-EZ) of your Form 1040.

Final Income Tax Returnfor Decedent—Form 1040The personal representative (defined earlier) must file the final income tax return (Form 1040) of the decedent for the year of death and any returns not filed for preceding years. A surviving spouse, under certain circumstances, may have to file the returns for the decedent. See Joint Return, later.

Return for preceding year. If an individual died after the close of the tax year, but before the return for that year was filed, the return for the year just closed will not be the final return. The return for that year will be a regular return and the personal representative must file it.

Example. Samantha Smith died on March 21, 2013, before filing her 2012 tax return. Her personal representative must file her 2012 re-turn by April 15, 2013. Her final tax return cover-ing the period from January 1, 2013, to March 20, 2013, is due April 15, 2014.

Name, Address,and SignatureWrite the word “DECEASED,” the decedent's name, and the date of death across the top of the tax return. If filing a joint return, write the name and address of the decedent and the sur-viving spouse in the name and address fields. If a joint return is not being filed, write the dece-dent's name in the name field and the personal representative's name and address in the ad-dress field.

Third party designee. You can check the “Yes” box in the Third Party Designee area on page 2 of the return to authorize the IRS to dis-cuss the return with a friend, family member, or any other person you choose. This allows the IRS to call the person you identified as the des-ignee to answer any questions that may arise during the processing of the return. It also al-lows the designee to perform certain actions. See the Instructions for Form 1040 for details.

Signature. If a personal representative has been appointed, that person must sign the re-turn. If it is a joint return, the surviving spouse must also sign it. If no personal representative has been appointed, the surviving spouse (on a joint return) signs the return and writes in the signature area “Filing as surviving spouse.” If no personal representative has been appointed and if there is no surviving spouse, the person in charge of the decedent's property must file


Publication 559 (2013) Page 3

and sign the return as “personal representa-tive.”

Paid preparer. If you pay someone to prepare, assist in preparing, or review the tax return, that person must sign the return and fill in the other blanks in the Paid Preparer Use Only area of the return. See the Form 1040 instructions for details.

When and Where To FileThe final income tax return is due at the same time the decedent's return would have been due had death not occurred. A final return for a decedent who was a calendar year taxpayer is generally due on April 15 following the year of death, regardless of when during that year death occurred. However, when the due date falls on a Saturday, Sunday, or legal holiday, the return is filed timely if filed by the next busi-ness day.

The tax return must be prepared for the year of death regardless of when during the year death occurred.

Generally, you must file the final income tax return of the decedent with the Internal Reve-nue Service Center for the place where you live. A tax return for a decedent can be electronically filed. A personal representative may also obtain an income tax filing extension on behalf of a de-cedent.

Filing RequirementsThe gross income, age, and filing status of a decedent generally determine whether a return must be filed. Gross income is all income re-ceived by an individual from any source in the form of money, goods, property, and services that is not tax-exempt. It includes gross receipts from self-employment, but if the business in-volves manufacturing, merchandising, or min-ing, subtract any cost of goods sold. In general, filing status depends on whether the decedent was considered single or married at the time of death. See the income tax return instructions or Publication 501, Exemptions, Standard Deduc-tion, and Filing Information.

RefundA return must be filed to obtain a refund if tax was withheld from salaries, wages, pensions, or annuities, or if estimated tax was paid, even if a return is not otherwise required to be filed. Also, the decedent may be entitled to other credits that result in a refund. These advance pay-ments of tax and credits are discussed later un-der Credits, Other Taxes, and Payments.

Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer. Form 1310 does not have to be filed if you are claim-ing a refund and you are:

A surviving spouse filing an original or amended joint return with the decedent, orA court-appointed or certified personal rep-resentative filing the decedent’s original re-turn and a copy of the court certificate showing your appointment is attached to the return.

If the personal representative is filing a claim for refund on Form 1040X, Amended U.S. Indi-vidual Income Tax Return, or Form 843, Claim for Refund and Request for Abatement, and the court certificate has already been filed with the IRS, attach Form 1310 and write “Certificate Previously Filed” at the bottom of the form.

Example. Edward Green died before filing his tax return. You were appointed the personal representative for Edward's estate, and you file his Form 1040 showing a refund due. You do not need Form 1310 to claim the refund if you attach a copy of the court certificate showing you were appointed the personal representa-tive.

If you are a surviving spouse and you receive a tax refund check in both your name and your deceased spouse's

name, you can have the check reissued in your name alone. Return the jointname check marked “VOID” to your local IRS office or the service center where you mailed your return, along with a written request for reissuance of the refund check. A new check will be issued in your name and mailed to you.

Death certificate. When filing the decedent's final income tax return, do not attach the death certificate or other proof of death to the final re-turn. Instead, keep it for your records and pro-vide it if requested.

Nonresident AlienIf the decedent was a nonresident alien who would have had to file Form 1040NR, U.S. Non-resident Alien Income Tax Return, you must file that form for the decedent's final tax year. See the Instructions for Form 1040NR for the filing requirements, due date, and where to file.

Joint ReturnGenerally, the personal representative and the surviving spouse can file a joint return for the decedent and the surviving spouse. However, the surviving spouse alone can file the joint re-turn if no personal representative has been ap-pointed before the due date for filing the final joint return for the year of death. This also ap-plies to the return for the preceding year if the decedent died after the close of the preceding tax year and before filing the return for that year. The income of the decedent that was includible on his or her return for the year up to the date of death (see Income To Include, later) and the in-come of the surviving spouse for the entire year must be included in the final joint return.

A final joint return with the decedent cannot be filed if the surviving spouse remarried before the end of the year of the decedent's death. The filing status of the decedent in this instance is married filing a separate return.

For information about tax benefits to which a surviving spouse may be entitled, see Tax Benefits for Survivors, later, under Other Tax Information.

TIP

Personal representative may revoke joint return election. A court-appointed personal representative may revoke an election to file a joint return previously made by the surviving spouse alone. This is done by filing a separate return for the decedent within one year from the due date of the return (including any exten-sions). The joint return made by the surviving spouse will then be regarded as the separate return of that spouse by excluding the dece-dent's items and refiguring the tax liability.

Relief from joint liability. In some cases, one spouse may be relieved of joint liability for tax, interest, and penalties on a joint return for items of the other spouse that were incorrectly reported on the joint return. If the decedent qualified for this relief while alive, the personal representative can pursue an existing request, or file a request, for relief from joint liability. For information on requesting this relief, see Publi-cation 971, Innocent Spouse Relief.

Income To IncludeThe decedent's income includible on the final return is generally determined as if the person were still alive except that the taxable period is usually shorter because it ends on the date of death. The method of accounting regularly used by the decedent before death also determines the income includible on the final return. This section explains how some types of income are reported on the final return.

For more information about accounting methods, see Publication 538, Accounting Peri-ods and Methods.

Cash MethodIf the decedent accounted for income under the cash method, only those items actually or con-structively received before death are included on the final return.

Constructive receipt of income. Interest from coupons on the decedent's bonds is con-structively received by the decedent if the cou-pons matured in the decedent's final tax year, but had not been cashed. Include the interest income on the final return.

Generally, a dividend is considered con-structively received if it was available for use by the decedent without restriction. If the corpora-tion customarily mailed its dividend checks, the dividend was includible when received. If the in-dividual died between the time the dividend was declared and the time it was received in the mail, the decedent did not constructively re-ceive it before death. Do not include the divi-dend in the final return.

Accrual MethodGenerally, under an accrual method of account-ing, income is reported when earned.

If the decedent used an accrual method, only the income items normally accrued before death are included on the final return.



Interest and Dividend Income(Forms 1099)Form(s) 1099 reporting interest and dividends earned by the decedent before death should be received and the amounts included on the de-cedent's final return. A separate Form 1099 should show the interest and dividends earned after the date of the decedent's death and paid to the estate or other recipient that must include those amounts on its return. You can request corrected Forms 1099 if these forms do not properly reflect the right recipient or amounts.

For example, a Form 1099-INT, reporting in-terest payable to the decedent, may include in-come that should be reported on the final in-come tax return of the decedent, as well as income that the estate or other recipient should report, either as income earned after death or as income in respect of the decedent (dis-cussed later). For income earned after death, you should ask the payer for a Form 1099 that properly identifies the recipient (by name and identification number) and the proper amount. If that is not possible, or if the form includes an amount that represents income in respect of the decedent, report the interest as shown next un-der How to report.

See U.S. savings bonds acquired from decedent under Income in Respect of a Decedent, later, for information on savings bond interest that may have to be reported on the final return.

How to report. If you are preparing the dece-dent's final return and you have received a Form 1099-INT for the decedent that includes amounts belonging to the decedent and to an-other recipient (the decedent's estate or an-other beneficiary), report the total interest shown on Form 1099-INT on Schedule B (Form 1040A or 1040), Interest and Ordinary Divi-dends. Next, enter a subtotal of the interest shown on Forms 1099, and the interest reporta-ble from other sources for which you did not re-ceive Forms 1099. Then, show any interest (in-cluding any interest you receive as a nominee) belonging to another recipient separately and subtract it from the subtotal. Identify the amount of this adjustment as “Nominee Distribution” or other appropriate designation.

Report dividend income for which you re-ceived a Form 1099-DIV, Dividends and Distri-butions, on the appropriate schedule using the same procedure.

Note. If the decedent received amounts as a nominee, you must give the actual owner a Form 1099, unless the owner is the decedent's spouse. See General Instructions for Certain In-formation Returns (Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G) for more informa-tion on filing Forms 1099.

Partnership IncomeThe death of a partner closes the partnership's tax year for that partner. Generally, it does not close the partnership's tax year for the remain-ing partners. The decedent's distributive share of partnership items must be figured as if the partnership's tax year ended on the date the partner died. To avoid an interim closing of the

partnership books, the partners can agree to estimate the decedent's distributive share by prorating the amounts the partner would have included for the entire partnership tax year.

On the decedent's final return, include the decedent's distributive share of partnership items for the following periods.

1. The partnership's tax year that ended within or with the decedent's final tax year (the year ending on the date of death).

2. The period, if any, from the end of the part-nership's tax year in (1) to the decedent's date of death.

Example. Mary Smith was a partner in XYZ partnership and reported her income on a tax year ending December 31. The partnership uses a tax year ending June 30. Mary died Au-gust 31, 2013, and her estate established its tax year through August 31.

The distributive share of partnership items based on the decedent's partnership interest is reported as follows.

Final Return for the Decedent—January 1 through August 31, 2013, includes XYZ partnership items from (a) the partnership tax year ending June 30, 2013, and (b) the partnership tax year beginning July 1, 2013, and ending August 31, 2013 (the date of death).Income Tax Return of the Estate—Sep-tember 1, 2013, through August 31, 2014, includes XYZ partnership items for the pe-riod September 1, 2013, through June 30, 2014.

S Corporation IncomeIf the decedent was a shareholder in an S cor-poration, include on the final return the dece-dent's share of the S corporation's items of in-come, loss, deduction, and credit for the following periods.

1. The corporation's tax year that ended within or with the decedent's final tax year (the year ending on the date of death).

2. The period, if any, from the end of the cor-poration's tax year in (1) to the decedent's date of death.

Self-Employment IncomeInclude self-employment income actually or constructively received or accrued, depending on the decedent's accounting method. For self-employment tax purposes only, the dece-dent's self-employment income will include the decedent's distributive share of a partnership's income or loss through the end of the month in which death occurred. For this purpose, the partnership's income or loss is considered to be earned ratably over the partnership's tax year.

Community IncomeIf the decedent was married and domiciled in a community property state, half of the income re-ceived and half of the expenses paid during the decedent's tax year by either the decedent or spouse may be considered to be the income

and expenses of the other. For more informa-tion, see Publication 555, Community Property.

HSA, Archer MSA, or Medicare Advantage MSAThe treatment of an HSA (health savings ac-count), an Archer MSA (medical savings ac-count), or a Medicare Advantage MSA at the death of the account holder, depends on who acquires the interest in the account. If the dece-dent's estate acquires the interest, the fair mar-ket value (FMV) of the assets in the account on the date of death is included in income on the decedent's final return. The estate tax deduc-tion, discussed later, does not apply to this amount.

If a beneficiary acquires the interest, see the discussion under Income in Respect of a Decedent, later. For other information on HSAs, Archer MSAs, or Medicare Advantage MSAs, see Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.

Coverdell Education Savings Account (ESA)Generally, the balance in a Coverdell ESA must be distributed within 30 days after the individual for whom the account was established reaches age 30, or dies, whichever is earlier. The treat-ment of the Coverdell ESA at the death of an in-dividual under age 30 depends on who ac-quires the interest in the account. If the decedent's estate acquires the interest, the earnings on the account must be included on the final income tax return of the decedent. The estate tax deduction, discussed later, does not apply to this amount. If a beneficiary acquires the interest, see the discussion under Income in Respect of a Decedent, later.

The age 30 limitation does not apply if the individual for whom the account was estab-lished or the beneficiary that acquires the ac-count is an individual with special needs. This includes an individual who, because of a physi-cal, mental, or emotional condition (including a learning disability), requires additional time to complete his or her education.

For more information on Coverdell ESAs, see Publication 970, Tax Benefits for Educa-tion.

Accelerated Death BenefitsAccelerated death benefits are amounts re-ceived under a life insurance contract before the death of the insured individual. These bene-fits also include amounts received on the sale or assignment of the contract to a viatical settle-ment provider.

Generally, if the decedent received acceler-ated death benefits on the life of a terminally or chronically ill individual, whether on his or her own life or on the life of another person, those benefits are not included in the decedent's in-come. For more information, see the discussion under Gifts, Insurance, and Inheritances under Other Tax Information, later.



Exemptionsand DeductionsGenerally, the rules for exemptions and deduc-tions allowed to an individual also apply to the decedent's final income tax return. Show on the final return deductible items the decedent paid (or accrued, if the decedent reported deduc-tions on an accrual method) before death. This section contains a detailed discussion of medi-cal expenses because the tax treatment of the decedent's medical expenses can be different. See Medical Expenses, later.

ExemptionsYou can claim the decedent's personal exemp-tion on the final income tax return. If the dece-dent was another person's dependent (for ex-ample, a parent's), you cannot claim the personal exemption on the decedent's final re-turn.

Standard DeductionIf you do not itemize deductions on the final re-turn, the full amount of the appropriate standard deduction is allowed regardless of the date of death. For information on the appropriate stand-ard deduction, see the Form 1040 income tax return instructions or Publication 501.

Medical ExpensesMedical expenses paid before death by the de-cedent are deductible, subject to limits, on the final income tax return if deductions are item-ized. This includes expenses for the decedent, as well as for the decedent's spouse and de-pendents.

Beginning in 2013, medical expenses exceeding 10% of adjusted gross income (AGI) may be deducted, unless

the decedent or their spouse is age 65 or older. In that case medical expenses exceeding 7.5% of AGI may be deducted.

Qualified medical expenses are not deductible if paid with a taxfree distribution from an HSA or an Archer

MSA.

Election for decedent's expenses. Medical expenses not paid before death are liabilities of the estate and are shown on the federal estate tax return (Form 706). However, if medical ex-penses for the decedent are paid out of the es-tate during the 1-year period beginning with the day after death, you can elect to treat all or part of the expenses as paid by the decedent at the time they were incurred.

If you make the election, you can claim all or part of the expenses on the decedent's income tax return (if deductions are itemized) rather than on the federal estate tax return (Form 706). You can deduct expenses incurred in the year of death on the final income tax return. You should file an amended return (Form 1040X) for medical expenses incurred in an earlier year, unless the statutory period for filing a claim for that year has expired.

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The amount you can deduct on the income tax return is the amount above 10% of adjusted gross income (or 7.5% of adjusted gross in-come if the decedent or the decedent's spouse was born before January 2, 1949). Amounts not deductible because of this percentage cannot be claimed on the federal estate tax return.

Making the election. You make the elec-tion by attaching a statement, in duplicate, to the decedent's income tax return or amended return. The statement must state that you have not claimed the amount as an estate tax deduc-tion, and that the estate waives the right to claim the amount as a deduction. This election applies only to expenses incurred for the dece-dent, not to expenses incurred to provide medi-cal care for dependents.

Example. Richard Brown used the cash method of accounting and filed his income tax return on a calendar year basis. Richard died on June 1, 2013, at the age of 78, after incurring $800 in medical expenses. Of that amount, $500 was incurred in 2012 and $300 was incur-red in 2013. Richard itemized his deductions when he filed his 2012 income tax return. The personal representative of the estate paid the entire $800 liability in August 2013.

The personal representative may file an amended return (Form 1040X) for 2012 claim-ing the $500 medical expense as a deduction, subject to the 7.5% limit. The $300 of expenses incurred in 2013 can be deducted on the final income tax return if deductions are itemized, subject to the 7.5% limit. The personal repre-sentative must file a statement in duplicate with each return stating that these amounts have not been claimed on the federal estate tax re-turn (Form 706), and waiving the right to claim such a deduction on Form 706 in the future.

Medical expenses not paid by estate. If you paid medical expenses for your deceased spouse or dependent, claim the expenses on your tax return for the year in which you paid them, whether they are paid before or after the decedent's death. If the decedent was a child of divorced or separated parents, the medical ex-penses can usually be claimed by both the cus-todial and noncustodial parent to the extent paid by that parent during the year.

Insurance reimbursements. Insurance reim-bursements of previously deducted medical ex-penses due a decedent at the time of death and later received by the decedent's estate are in-cludible in the income tax return of the estate (Form 1041) for the year the reimbursements are received. The reimbursements are also in-cludible in the decedent's gross estate.

No deduction for funeral expenses can be taken on the final Form 1040 of a decedent. These expenses may be

deductible for estate tax purposes on Form 706.

Deduction for LossesA decedent's net operating loss deduction from a prior year and any capital losses (including capital loss carryovers) can be deducted only on the decedent's final income tax return. A net operating loss on the decedent's final income

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tax return can be carried back to prior years. (See Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts.) You cannot deduct any unused net operating loss or capital loss on the estate's income tax return.

At-risk loss limits. Special at-risk rules apply to most activities that are engaged in as a trade or business or for the production of income.

These rules limit the deductible loss to the amount which the individual was considered at-risk in the activity. An individual generally will be considered at-risk to the extent of the money and the adjusted basis of property that he or she contributed to the activity and certain amounts the individual borrowed for use in the activity. An individual will be considered at-risk for amounts borrowed only if he or she was per-sonally liable for the repayment or if the amounts borrowed were secured by property other than that used in the activity. The individ-ual is not considered at-risk for borrowed amounts if the lender has an interest in the ac-tivity or if the lender is related to a person who has an interest in the activity. For more informa-tion, see Publication 925, Passive Activity and At-Risk Rules.

Passive activity rules. A passive activity is any trade or business activity in which the tax-payer does not materially participate. To deter-mine material participation, see Publication 925. Rental activities are passive activities regard-less of the taxpayer's participation, unless the taxpayer meets certain eligibility requirements.

Individuals, estates, and trusts can offset passive activity losses only against passive ac-tivity income. Passive activity losses or credits not allowed in one tax year can be carried for-ward to the next year.

If a passive activity interest is transferred be-cause a taxpayer dies, the accumulated unused passive activity losses are allowed as a deduc-tion against the decedent's income in the year of death. Losses are allowed only to the extent they are greater than the excess of the transfer-ee's (recipient of the interest transferred) basis in the property over the decedent's adjusted ba-sis in the property immediately before death. The part of the accumulated losses equal to the excess is not allowed as a deduction for any tax year.

Use Form 8582, Passive Activity Loss Limi-tations, to summarize losses and income from passive activities and to figure the amounts al-lowed. For more information, see Publication 925.

Credits, Other Taxes,and PaymentsDiscussed below are some of the tax credits, types of taxes that may be owed, income tax withheld, and estimated tax payments reported on the final return of a decedent.



CreditsOn the final income tax return, you can claim any tax credits that applied to the decedent be-fore death. Some of these credits are discussed next.

Earned income credit. If the decedent was an eligible individual, you can claim the earned in-come credit on the decedent's final return even though the return covers less than 12 months. If the allowable credit is more than the tax liability for the year, the excess is refunded.

For more information, see Publication 596, Earned Income Credit (EIC).

Credit for the elderly or the disabled. This credit is allowable on a decedent's final income tax return if the decedent met both of the follow-ing requirements in the year of death. The de-cedent:

Was a “qualified individual,” andHad income (adjusted gross income (AGI) and nontaxable social security and pen-sions) less than certain limits.

For details on qualifying for or figuring the credit, see Publication 524, Credit for the Eld-erly or the Disabled.

Child tax credit. If the decedent had a qualify-ing child, you may be able to claim the child tax credit on the decedent's final return even though the return covers less than 12 months. You may be able to claim the additional child tax credit and get a refund if the credit is more than the decedent's liability. For more informa-tion, see the Instructions for Form 1040.

Adoption credit. Depending upon when the adoption was finalized, this credit may be taken on a decedent's final income tax return if the de-cedent:

Adopted an eligible child and paid qualified adoption expenses, orHas a carryforward of an adoption credit from a prior year.

Also, if the decedent is survived by a spouse who meets the filing status of qualifying widow(er), unused adoption credit may be car-ried forward and used following the death of the decedent. See Form 8839, Qualified Adoption Expenses, and its instructions for more details.

General business tax credit. The general business credit available to a taxpayer is limi-ted. Any credit arising in a tax year beginning before 1998 that has not been used up can be carried forward for up to 15 years. Any unused credit arising in a tax year beginning after 1997 has a 1-year carryback and a 20-year carryfor-ward period.

After the carryforward period, a deduction may be allowed for any unused business credit. If the taxpayer dies before the end of the carry-forward period, the deduction generally is al-lowed in the year of death.

For more information on the general busi-ness credit, see Publication 334, Tax Guide for Small Business.

Other TaxesTaxes other than income tax that may be owed on the final return of a decedent include self-employment tax and alternative minimum tax, which are reported on Form 1040.

Self-employment tax. Self-employment tax may be owed on the final return if either of the following applied to the decedent in the year of death:

1. Net earnings from self-employment (ex-cluding income described in (2)) were $400 or more; or

2. Wages from services performed as a church employee were $108.28 or more.

Alternative minimum tax (AMT). The tax laws give special treatment to certain types of income and allow special deductions and cred-its for certain types of expenses. The alternative minimum tax (AMT) was enacted so taxpayers who benefit from these laws still pay at least a minimum amount of tax. In general, the AMT is the excess of the tentative minimum tax over the regular tax shown on the return.

Form 6251. Use Form 6251, Alternative Minimum Tax—Individuals, to determine if this tax applies to the decedent. See the form in-structions for information on when you must at-tach Form 6251 to Form 1040.

Form 8801. If the decedent paid AMT in a previous year or had a credit carryforward, the decedent may be eligible for a minimum tax credit. See Form 8801, Credit for Prior Year Minimum Tax—Individuals, Estates, and Trusts.

Payments of TaxThe income tax withheld from the decedent's salary, wages, pensions, or annuities, and the amount paid as estimated tax are credits (ad-vance payments of tax) that must be claimed on the final return.

Tax Forgiveness forArmed Forces Members,Victims of Terrorism, andAstronautsIncome tax liability may be forgiven for a dece-dent who dies due to service in a combat zone, due to military or terrorist actions, as a result of a terrorist attack, or while serving in the line of duty as an astronaut.

Combat ZoneIf a member of the Armed Forces of the United States dies while in active service in a combat zone or from wounds, disease, or injury incur-red in a combat zone, the decedent's income tax liability is abated (forgiven) for the entire year in which death occurred and for any prior tax year ending on or after the first day the per-son served in a combat zone in active service. For this purpose, a qualified hazardous duty area is treated as a combat zone.

If the tax (including interest, additions to the tax, and additional amounts) for these years has been assessed, the assessment will be for-given. If the tax has been collected (regardless of the date of collection), that tax will be credi-ted or refunded.

Any of the decedent's income tax for tax years before those mentioned above that re-mains unpaid as of the actual (or presumptive) date of death will not be assessed. If any un-paid tax (including interest, additions to the tax, and additional amounts) has been assessed, this assessment will be forgiven. Also, if any tax was collected after the date of death, that amount will be credited or refunded.

The date of death of a member of the Armed Forces reported as missing in action or as a prisoner of war is the date his or her name is re-moved from missing status for military pay pur-poses. This is true even if death actually occur-red earlier.

For other tax information for members of the Armed Forces, see Publication 3, Armed Forces' Tax Guide.

Military or Terrorist ActionsThe decedent's income tax liability is forgiven if, at death, he or she was a military or civilian em-ployee of the United States who died because of wounds or injury incurred:

While a U.S. employee, andIn a military or terrorist action.

The forgiveness applies to the tax year in which death occurred and for any earlier tax year, beginning with the year before the year in which the wounds or injury occurred.

Example. The income tax liability of a civil-ian employee of the United States who died in 2013 because of wounds incurred while a U.S. employee in a terrorist attack that occurred in 2008 will be forgiven for 2013 and for all prior tax years in the period 2007 through 2012. Re-funds are allowed for the tax years for which the period for filing a claim for refund has not ended, as discussed later.

Military or terrorist action defined. A military or terrorist action means the following.

Any terrorist activity that most of the evi-dence indicates was directed against the United States or any of its allies.Any military action involving the U.S. Armed Forces and resulting from violence or aggression against the United States or any of its allies, or the threat of such vio-lence or aggression.

Terrorist activity includes criminal offenses intended to coerce, intimidate, or retaliate against the government or civilian population. Military action does not include training exerci-ses. Any multinational force in which the United States is participating is treated as an ally of the United States.

Determining if a terrorist activity or military action has occurred. You may rely on published guidance from the IRS to determine if



a particular event is considered a terrorist activ-ity or military action.

Specified Terrorist VictimThe Victims of Terrorism Tax Relief Act of 2001 (the Act) provides tax relief for those injured or killed as a result of terrorist attacks, certain sur-vivors of those killed as a result of terrorist at-tacks, and others who were affected by terrorist attacks. Under the Act, the federal income tax li-ability of those killed in the following attacks (specified terrorist victim) is forgiven for certain tax years.

The April 19, 1995, terrorist attack on the Alfred P. Murrah Federal Building (Okla-homa City).The September 11, 2001, terrorist attacks.The terrorist attacks involving anthrax oc-curring after September 10, 2001, and be-fore January 1, 2002.

The Act also exempts from federal income tax the following types of income.

Qualified disaster relief payments made af-ter September 10, 2001, to cover personal, family, living, or funeral expenses incurred because of a terrorist attack.Certain disability payments received in tax years ending after September 10, 2001, for injuries sustained in a terrorist attack.Certain death benefits paid by an employer to the survivor of an employee because the employee died as a result of a terrorist at-tack.Payments from the September 11th Victim Compensation Fund 2001.

The Act also reduces the estate tax of indi-viduals who die as a result of a terrorist attack. See Publication 3920, Tax Relief for Victims of Terrorist Attacks, for more information.

AstronautsLegislation extended the tax relief available un-der the Victims of Terrorism Tax Relief Act of 2001 (the Act) to astronauts who died in the line of duty after December 31, 2002. The dece-dent's income tax liability is forgiven for the tax year in which death occurs, and for the tax year prior to death. For information on death benefit payments and the reduction of federal estate taxes, see Publication 3920. However, the dis-cussions in that publication under Death Benefits and Estate Tax Reduction should be modi-fied for astronauts (for example, by using the date of death of the astronaut instead of Sep-tember 11, 2001).

For more information on the Act, see Publi-cation 3920.

Claim for Credit or RefundIf any of these tax-forgiveness situations ap-plies to a prior year tax, any tax paid for which the period for filing a claim has not ended will be credited or refunded. If any tax is still due, it will be canceled. The normal period for filing a claim for credit or refund is 3 years after the re-turn was filed or 2 years after the tax was paid, whichever is later.

If death occurred in a combat zone or from wounds, disease, or injury incurred in a combat zone, the period for filing the claim is extended by:

1. The amount of time served in the combat zone (including any period in which the in-dividual was in missing status), plus

2. The period of continuous qualified hospi-talization for injury from service in the combat zone, if any, plus

3. The next 180 days.Qualified hospitalization means any hospitaliza-tion outside the United States and any hospitali-zation in the United States of not more than 5 years.

This extended period for filing the claim also applies to a member of the Armed Forces who was deployed outside the United States in a designated contingency operation.

Filing a claim. Use the following procedures to file a claim.

If a U.S. individual income tax return (Form 1040, 1040A, or 1040EZ) has not been filed, you should make a claim for refund of any withheld income tax or estimated tax payments by filing Form 1040. Form W-2, Wage and Tax Statement, must accom-pany all returns.If a U.S. individual income tax return has been filed, you should make a claim for re-fund by filing Form 1040X. You must file a separate Form 1040X for each year in question.

You must file these returns and claims at the following address for regular mail (U.S. Postal Service).

Internal Revenue Service333 W. Pershing, P5–6503Kansas City, MO 64108

Identify all returns and claims for refund by writing “Iraq—KIA,” “Enduring Freedom—KIA,” “Kosovo Operation—KIA,” “Desert Storm—KIA,” or “Former Yugoslavia—KIA” in bold letters on the top of page 1 of the return or claim. On the applicable return, write the same phrase on the line for total tax. If the individual was killed in a terrorist or military action, put “KITA” on the front of the return and on the line for total tax.

Include an attachment showing the compu-tation of the decedent's tax liability and a com-putation of the amount to be forgiven. On joint returns, make an allocation of the tax as descri-bed below under Joint returns. If you cannot make a proper allocation, attach a statement of all income and deductions allocable to each spouse and the IRS will make the proper alloca-tion.

You must attach Form 1310 to all returns and claims for refund. However, for exceptions to filing Form 1310, see Form 1310. Statement of Person Claiming Refund Due a Deceased Taxpayer, under Refund, earlier.

You must also attach proof of death that in-cludes a statement that the individual was a U.S. employee on the date of injury and on the date of death and died as the result of a military

or terrorist action. For military and civilian em-ployees of the Department of Defense, attach DD Form 1300, Report of Casualty. For other U.S. civilian employees killed in the United States, attach a death certificate and a certifica-tion (letter) from the federal employer. For other U.S. civilian employees killed overseas, attach a certification from the Department of State.

If you do not have enough tax information to file a timely claim for refund, you can suspend the period for filing a claim by filing Form 1040X. Attach Form 1310, any required docu-mentation currently available, and a statement that you will file an amended claim as soon as you have the required tax information.

Joint returns. If a joint return was filed, only the decedent's part of the income tax liabil-ity is eligible for forgiveness. Determine the de-cedent's tax liability as follows.

1. Figure the income tax for which the dece-dent would have been liable if a separate return had been filed.

2. Figure the income tax for which the spouse would have been liable if a sepa-rate return had been filed.

3. Multiply the joint tax liability by a fraction. The numerator of the fraction is the amount in (1), above. The denominator of the fraction is the total of (1) and (2).

The resulting amount from (3) above is the decedent's tax liability eligible for forgiveness.

Filing RemindersTo minimize the time needed to process the de-cedent's final return and issue any refund, be sure to follow these procedures.

1. Write “DECEASED,” the decedent's name, and the date of death across the top of the tax return.

2. If a personal representative has been ap-pointed, the personal representative must sign the return. If it is a joint return, the sur-viving spouse must also sign it.

3. If you are the decedent's spouse filing a joint return with the decedent and no per-sonal representative has been appointed, write “Filing as surviving spouse” in the area where you sign the return.

4. If no personal representative has been ap-pointed and if there is no surviving spouse, the person in charge of the dece-dent's property must file and sign the re-turn as “personal representative.”

5. To claim a refund for the decedent, do the following.a. If you are the decedent's spouse filing

a joint return with the decedent, file only the tax return to claim the refund.

b. If you are the personal representative and the return is not a joint return filed with the decedent's surviving spouse, file the return and attach a copy of the certificate that shows your appoint-ment by the court. (A power of attor-ney or a copy of the decedent's will is not acceptable evidence of your



appointment as the personal repre-sentative.) If you are filing an amen-ded return, attach Form 1310 and a copy of the certificate of appointment (or, if you have already sent the certifi-cate of appointment to IRS, write “Certificate Previously Filed” at the bottom of Form 1310).

c. If you are not filing a joint return as the surviving spouse and a personal rep-resentative has not been appointed, file the return and attach Form 1310.

Other Tax InformationDiscussed below is information about the effect of an individual's death on the income tax liabil-ity of the survivors (including widows and wid-owers), the beneficiaries, and the estate.

Tax Benefits for SurvivorsSurvivors can qualify for certain benefits when filing their own income tax returns.

Joint return by surviving spouse. A surviv-ing spouse can file a joint return for the year of death and may qualify for special tax rates for the following 2 years, as explained under Qualifying widows and widowers, later.

Decedent as your dependent. If the dece-dent qualified as your dependent for a part of the year before death, you can claim the ex-emption for the dependent on your tax return, regardless of when death occurred during the year.

If the decedent was your qualifying child, you may be able to claim the child tax credit or the earned income credit. To determine if you qualify for the child tax credit, see the instruc-tions for Form 1040, line 51; Form 1040A, line 33; or Form 1040NR, line 48. To determine if you qualify for the earned income credit, see the instructions for Form 1040, lines 64a and 64b or Form 1040A, lines 38a and 38b.

Qualifying widows and widowers. If your spouse died within the 2 tax years preceding the year for which your return is being filed, you may be eligible to claim the filing status of quali-fying widow(er) with dependent child and qual-ify to use the married-filing-jointly tax rates.

Requirements. Generally, you qualify for this special benefit if you meet all of the follow-ing requirements.

You were entitled to file a joint return with your spouse for the year of death—whether or not you actually filed jointly.You did not remarry before the end of the current tax year.You have a child, stepchild, or foster child who qualifies as your dependent for the tax year.You provide more than half the cost of maintaining your home, which is the princi-pal residence of that child for the entire year except for temporary absences.

Example. William Burns' wife died in 2010. William has not remarried and continued throughout 2011 and 2012 to maintain a home for himself and his dependent child. For 2010, he was entitled to file a joint return for himself and his deceased wife. For 2011 and 2012, he qualifies to file as a qualifying widower with de-pendent child. For later years, he may qualify to file as a head of household.

Figuring your tax. Check the box on line 5 (Form 1040 or 1040A) under Filing Status on your tax return. Use the Tax Rate Schedule or the column in the Tax Table for Married filing jointly, which gives you the split-income bene-fits.

The last year you can file jointly with, or claim an exemption for, your deceased spouse is the year of death.

Joint return filing rules. If you are the surviv-ing spouse and a personal representative is handling the estate for the decedent, you should coordinate filing your return for the year of death with this personal representative. See Joint Return under Final Income Tax Return for Decedent—Form 1040, earlier.

Income in Respectof a DecedentAll income the decedent would have received had death not occurred that was not properly in-cludible on the final return, discussed earlier, is income in respect of a decedent.

If the decedent is a specified terrorist victim (see Specified Terrorist Victim, earlier), income received after the date

of death and before the end of the decedent's tax year (determined without regard to death) is excluded from the recipient's gross income. This exclusion does not apply to certain income. For more information, see Publication 3920.

How To ReportIncome in respect of a decedent must be inclu-ded in the income of one of the following.

The decedent's estate, if the estate re-ceives it.The beneficiary, if the right to income is passed directly to the beneficiary and the beneficiary receives it.Any person to whom the estate properly distributes the right to receive it.

If you have to include income in respect of a decedent in your gross income and an estate tax return (Form

706) was filed for the decedent, you may be able to claim a deduction for the estate tax paid on that income. See Estate Tax Deduction, later.

Example 1. Frank Johnson owned and op-erated an apple orchard. He used the cash method of accounting. He sold and delivered 1,000 bushels of apples to a canning factory for $2,000, but did not receive payment before his death. The proceeds from the sale are income in respect of a decedent. When the estate was

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settled, payment had not been made and the estate transferred the right to the payment to his widow. When Frank's widow collects the $2,000, she must include that amount in her re-turn. It is not reported on the final return of the decedent or on the return of the estate.

Example 2. Assume the same facts as in Example 1, except that Frank used the accrual method of accounting. The amount accrued from the sale of the apples would be included on his final return. Neither the estate nor the widow would realize income in respect of a de-cedent when the money is later paid.

Example 3. On February 1, George High, a cash method taxpayer, sold his tractor for $3,000, payable March 1 of the same year. His adjusted basis in the tractor was $2,000. George died on February 15, before receiving payment. The gain to be reported as income in respect of a decedent is the $1,000 difference between the decedent's basis in the property and the sale proceeds. In other words, the in-come in respect of a decedent is the gain the decedent would have realized had he lived.

Example 4. Cathy O'Neil was entitled to a large salary payment at the date of her death. The amount was to be paid in five annual in-stallments. The estate, after collecting two in-stallments, distributed the right to the remaining installments to you, the beneficiary. The pay-ments are income in respect of a decedent. None of the payments were includible on Cathy's final return. The estate must include in its income the two installments it received, and you must include in your income each of the three installments as you receive them.

Example 5. You inherited the right to re-ceive renewal commissions on life insurance sold by your father before his death. You inheri-ted the right from your mother, who acquired it by bequest from your father. Your mother died before she received all the commissions she had the right to receive, so you received the rest. The commissions are income in respect of a decedent. None of these commissions were includible in your father's final return. The com-missions received by your mother were inclu-ded in her income. The commissions you re-ceived are not includible in your mother's income, even on her final return. You must in-clude them in your income.

Character of income. The character of the in-come you receive in respect of a decedent re-mains the same as it would have been to the decedent if he or she were alive. If the income would have been a capital gain to the decedent, it will be a capital gain to you.

Transfer of right to income. If you transfer your right to income in respect of a decedent, you must include in your income the greater of:

The amount you receive for the right, orThe fair market value of the right you trans-fer.

If you make a gift of such a right, you must include in your income the fair market value of the right at the time of the gift.



If the right to income from an installment ob-ligation is transferred, the amount you must in-clude in income is reduced by the basis of the obligation. See Installment obligations, later.

Transfer defined. A transfer for this pur-pose includes a sale, exchange, or other dispo-sition, the satisfaction of an installment obliga-tion at other than face value, or the cancellation of an installment obligation.

Installment obligations. If the decedent sold property using the installment method and you are collecting payments on an installment obli-gation acquired from the decedent, use the same gross profit percentage the decedent used to figure the part of each payment that represents profit. Include in your income the same profit the decedent would have included had death not occurred. For more information, see Publication 537, Installment Sales.

If you dispose of an installment obligation acquired from a decedent (other than by trans-fer to the obligor), the rules explained in Publi-cation 537 for figuring gain or loss on the dispo-sition apply to you.

Transfer to obligor. A transfer of a right to income, discussed earlier, has occurred if the decedent (seller) sold property using the install-ment method and the installment obligation was transferred to the obligor (buyer or person le-gally obligated to pay the installments). A trans-fer also occurs if the obligation was canceled ei-ther at death or by the estate or person receiving the obligation from the decedent. An obligation that becomes unenforceable is trea-ted as having been canceled.

If such a transfer occurs, the amount inclu-ded in the income of the transferor (the estate or beneficiary) is the greater of the amount re-ceived or the fair market value of the installment obligation at the time of transfer, reduced by the basis of the obligation. The basis of the obliga-tion is the decedent's basis, adjusted for all in-stallment payments received after the dece-dent's death and before the transfer.

If the decedent and obligor were related per-sons, the fair market value of the obligation can-not be less than its face value.

Specific Types of Incomein Respect of a DecedentThis section explains and provides examples of some specific types of income in respect of a decedent.

Wages. The entire amount of wages or other employee compensation earned by the dece-dent but unpaid at the time of death is income in respect of a decedent. The income is not re-duced by any amounts withheld by the em-ployer. If the income is $600 or more, the em-ployer should report it in box 3 of Form 1099-MISC, Miscellaneous Income, and give the recipient a copy of the form or a similar statement.

Wages paid as income in respect of a dece-dent are not subject to federal income tax with-holding. However, if paid during the calendar year of death, they are subject to withholding for social security and Medicare taxes. These taxes should be included on the decedent's

Form W-2 along with the taxes withheld before death. These wages are not included in box 1 of Form W-2.

Wages paid as income in respect of a dece-dent after the year of death generally are not subject to withholding for any federal taxes.

Farm income from crops, crop shares, and livestock. A farmer's growing crops and live-stock at the date of death normally would not give rise to income in respect of a decedent or income to be included in the final return. How-ever, when a cash method farmer receives rent in the form of crop shares or livestock and owns the crop shares or livestock at the time of death, the rent is income in respect of a decedent and is reported in the year in which the crop shares or livestock are sold or otherwise disposed of. The same treatment applies to crop shares or livestock that the decedent had a right to re-ceive as rent at the time of death for economic activities that occurred before death.

If the individual died during a rental period, only the proceeds from the part of the rental pe-riod ending on the date of death are income in respect of a decedent. The proceeds from the rental period from the day after death to the end of the rental period are income to the estate. Cash rent or crop shares and livestock received as rent and reduced to cash by the decedent are includible on the final return even though the rental period did not end until after death.

Example. Alonzo Roberts, who used the cash method of accounting, leased part of his farm for a 1-year period beginning March 1. The rental was one-third of the crop, payable in cash when the crop share is sold at the direction of Alonzo. He died on June 30 and was alive dur-ing 122 days of the rental period. Seven months later, Alonzo's personal representative ordered the crop to be sold and was paid $1,500. Of the $1,500, 122/365, or $501, is income in respect of a decedent. The balance of the $1,500 re-ceived by the estate, $999, is income to the es-tate.

Partnership income. If the decedent had been receiving payments representing a distrib-utive share or guaranteed payment in liquida-tion of his or her interest in a partnership, the re-maining payments made to the estate or other successor in interest are income in respect of a decedent. The estate or the successor receiv-ing the payments must include them in income when received. Similarly, the estate or other successor in interest receives income in re-spect of a decedent if amounts are paid by a third person in exchange for the successor's right to the future payments.

For a discussion of partnership rules, see Publication 541, Partnerships.

U.S. savings bonds acquired from dece-dent. If series EE or series I U.S. savings bonds, owned by a cash method taxpayer who reported the interest each year, or by an accrual method taxpayer are transferred because of death, the increase in value of the bonds (inter-est earned) in the year of death up to the date of death must be reported on the decedent's final return. The transferee (estate or beneficiary) re-ports on its return only the interest earned after the date of death.

The redemption values of U.S. savings bonds generally are available from local banks, credit unions, savings and loan institutions, or your nearest Federal Reserve Bank.

You also can get information by writing to the following address.

Series EE and IBureau of the Fiscal ServiceDivision of Customer Assistance

P.O. Box 7015Parkersburg, WV 26106-7015

Or, on the Internet, visit:www.treasurydirect.gov.

If the bonds transferred because of death were owned by a cash method taxpayer who chose not to report the interest each year and had purchased the bonds entirely with personal funds, interest earned before death must be re-ported in one of the following ways.

1. The person (executor, administrator, etc.) who is required to file the decedent's final income tax return can elect to include all of the interest earned on the bonds before the decedent's death on the return. The transferee (estate or beneficiary) then in-cludes only the interest earned after the date of death on its return.

2. If the election in (1), above, was not made, the interest earned to the date of death is income in respect of the decedent and is not included on the decedent's final return. In this case, all of the interest earned be-fore and after the decedent's death is in-come to the transferee (estate or benefi-ciary). A transferee who uses the cash method of accounting and who has chosen not to report the interest annually may defer reporting any of it as income un-til the bonds are either cashed or reach the date of maturity, whichever is earlier. In the year the interest is reported, the transferee may claim a deduction for any federal estate tax paid that arose because of the part of interest (if any) included in the decedent's estate.

Example 1. Your uncle, a cash method tax-payer, died and left you a $1,000 series EE bond. He bought the bond for $500 and had not chosen to report the increase in value each year. At the date of death, interest of $94 had accrued on the bond, and its value of $594 at date of death was included in your uncle's es-tate. Your uncle's personal representative did not choose to include the $94 accrued interest on the decedent's final income tax return. You are a cash method taxpayer and do not choose to report the increase in value each year as it is earned. Assuming you cash it when it reaches maturity value of $1,000, you would report $500 interest income (the difference between matur-ity value of $1,000 and the original cost of $500) in that year. You also are entitled to claim, in that year, a deduction for any federal estate tax resulting from the inclusion in your uncle's es-tate of the $94 increase in value.

Example 2. If, in Example 1, the personal representative had chosen to include the $94



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interest earned on the bond before death in the final income tax return of your uncle, you would report $406 ($500 − $94) as interest when you cashed the bond at maturity. This $406 repre-sents the interest earned after your uncle's death and was not included in his estate, so no deduction for federal estate tax is allowable for this amount.

Example 3. Your uncle died owning series HH bonds he acquired in exchange for series EE bonds. You were the beneficiary on these bonds. Your uncle used the cash method of ac-counting and had not chosen to report the in-crease in redemption price of the series EE bonds each year as it accrued. Your uncle's personal representative made no election to in-clude any interest earned before death on the decedent's final return. Your income in respect of the decedent is the sum of the unreported in-crease in value of the series EE bonds, which constituted part of the amount paid for series HH bonds, and the interest, if any, payable on the series HH bonds but not received as of the date of the decedent's death.

Specific dollar amount legacy satisfied by transfer of bonds. If a beneficiary receives series EE or series I bonds from an estate in satisfaction of a specific dollar amount legacy and the decedent was a cash method taxpayer who did not elect to report interest each year, only the interest earned after receipt of the bonds is income to the beneficiary. The interest earned to the date of death plus any further in-terest earned to the date of distribution is in-come to (and reportable by) the estate.

Cashing U.S. savings bonds. When you cash a U.S. savings bond that you acquired from a decedent, the bank or other payer that redeems it must give you a Form 1099-INT if the interest part of the payment you receive is $10 or more. Your Form 1099-INT should show the difference between the amount received and the cost of the bond. The interest shown on your Form 1099-INT will not be reduced by any interest reported by the decedent before death, or, if elected, by the personal representative on the final income tax return of the decedent, or by the estate on the estate's income tax return. Your Form 1099-INT may show more interest than you must include in your income.

You must make an adjustment on your tax return to report the correct amount of interest. Report the total interest shown on Form 1099-INT on your Schedule B (Form 1040A or 1040). Enter a subtotal of the interest shown on Forms 1099, and the interest reportable from other sources for which you did not receive Forms 1099. Show the total interest that was previously reported and subtract it from the sub-total. Identify this adjustment as “U.S. Savings Bond Interest Previously Reported.”

Interest accrued on U.S. Treasury bonds. The interest accrued on U.S. Treasury bonds owned by a cash method taxpayer and redeem-able for the payment of federal estate taxes that was not received as of the date of the individu-al's death is income in respect of a decedent. This interest is not included in the decedent's fi-nal income tax return. The estate will treat such interest as taxable income in the tax year re-

ceived if it chooses to redeem the U.S. Treas-ury bonds to pay federal estate taxes. If the per-son entitled to the bonds (by bequest, devise, or inheritance, or because of the death of the in-dividual) receives them, that person will treat the accrued interest as taxable income in the year the interest is received. Interest that ac-crues on the U.S. Treasury bonds after the owner's death does not represent income in re-spect of a decedent. The interest, however, is taxable income and must be included in the in-come of the respective recipients.

Interest accrued on savings certificates. The interest accrued on savings certificates (re-deemable after death without forfeiture of inter-est) for the period from the date of the last inter-est payment and ending with the date of the decedent's death, but not received as of that date, is income in respect of a decedent. Inter-est accrued after the decedent's death that be-comes payable on the certificates after death is not income in respect of a decedent, but is taxa-ble income includible in the income of the re-spective recipients.

Inherited IRAs. If a beneficiary receives a lump-sum distribution from a traditional IRA he or she inherited, all or some of it may be taxa-ble. The distribution is taxable in the year re-ceived as income in respect of a decedent up to the decedent's taxable balance. This is the de-cedent's balance at the time of death, including unrealized appreciation and income accrued to date of death, minus any basis (nondeductible contributions). Amounts distributed that are more than the decedent's entire IRA balance (includes taxable and nontaxable amounts) at the time of death are the income of the benefi-ciary.

If the beneficiary of a traditional IRA is the decedent's surviving spouse who properly rolls over the distribution into another traditional IRA, the distribution is not currently taxed. A surviv-ing spouse can also roll over tax free the taxa-ble part of the distribution into a qualified plan, section 403 annuity, or section 457 plan.

For more information on inherited IRAs, see Publication 590, Individual Retirement Arrange-ments (IRAs).

Roth IRAs. Qualified distributions from a Roth IRA are not subject to tax. A distribution made to a beneficiary or to the Roth IRA owner's es-tate on or after the date of death is a qualified distribution if it is made after the 5-tax-year pe-riod beginning with the first tax year in which a contribution was made to any Roth IRA of the owner.

Generally, the entire interest in the Roth IRA must be distributed by the end of the fifth calen-dar year after the year of the owner's death un-less the interest is payable to a designated ben-eficiary over his or her life or life expectancy. If paid as an annuity, the distributions must begin before the end of the calendar year following the year of death. If the sole beneficiary is the decedent's spouse, the spouse can delay the distributions until the decedent would have reached age 7012 or can treat the Roth IRA as his or her own Roth IRA.

The part of any distribution made to a bene-ficiary that is not a qualified distribution may be

includible in the beneficiary's income. Gener-ally, the part includible is the earnings in the Roth IRA. Earnings attributable to the period ending with the decedent's date of death are in-come in respect of a decedent. Additional earn-ings are the income of the beneficiary.

For more information on Roth IRAs, see Publication 590.

Coverdell education savings account (ESA). Generally, the balance in a Coverdell ESA must be distributed within 30 days after the individual for whom the account was estab-lished reaches age 30 or dies, whichever is ear-lier. The treatment of the Coverdell ESA at the death of an individual under age 30 depends on who acquires the interest in the account. If the decedent's estate acquires the interest, see the discussion under Final Income Tax Return for Decedent—Form 1040, earlier.

The age 30 limitation does not apply if the individual for whom the account was established or the beneficiary that

acquires the account is an individual with special needs. This includes an individual who, because of a physical, mental, or emotional condition (including a learning disability), requires additional time to complete his or her education.

If the decedent's spouse or other family member is the designated beneficiary of the de-cedent's account, the Coverdell ESA becomes that person's Coverdell ESA. It is subject to the rules discussed in Publication 970.

Any other beneficiary (including a spouse or family member who is not the designated bene-ficiary) must include in income the earnings por-tion of the distribution. Any balance remaining at the close of the 30-day period is deemed to be distributed at that time. The amount included in income is reduced by any qualified education expenses of the decedent that are paid by the beneficiary within one year after the decedent's date of death. An estate tax deduction, dis-cussed later, applies to the amount included in income by a beneficiary other than the dece-dent's spouse or family member.

HSA, Archer MSA, or a Medicare Advantage MSA. The treatment of an HSA, Archer MSA, or a Medicare Advantage MSA at the death of the account holder depends on who acquires the interest in the account. If the decedent's es-tate acquired the interest, see the discussion under Final Income Tax Return for Decedent—Form 1040, earlier.

If the decedent's spouse is the designated beneficiary of the account, the account be-comes that spouse's Archer MSA. It is subject to the rules discussed in Publication 969.

Any other beneficiary (including a spouse that is not the designated beneficiary) must in-clude in income the fair market value of the as-sets in the account on the decedent's date of death. This amount must be reported for the beneficiary's tax year that includes the dece-dent's date of death. The amount included in in-come is reduced by any qualified medical ex-penses for the decedent paid by the beneficiary within one year after the decedent's date of death. An estate tax deduction, discussed later, applies to the amount included in income by a beneficiary other than the decedent's spouse.

CAUTION!



Deductions in Respectof a DecedentItems such as business expenses, income-pro-ducing expenses, interest, and taxes, for which the decedent was liable but that are not prop-erly allowable as deductions on the decedent's final income tax return will be allowed as a de-duction to one of the following when pa

administrators executors, and survivors,ss-4 56 1040 1041 706 709 1310 file all tax returns,...

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